What Is A Domestic Asset Protection Trust and How Does It Work

It may be no secret that we live in a litigious society. Business owners, people worried about an expensive divorce, working professionals who operate in a legally treacherous environment, and others, are all potentially at risk of devastating lawsuits. Did you know, however, that a Domestic Asset Protection Trust is one way to protect yourself?

First, it is important for you to know that there are many types of trust agreements that you can create and use with your experienced Florida estate planning attorney. A Domestic Asset Protection Trust, or DAPT, is a complicated legal arrangement that protects the assets you put into it if the trust is properly established. A DAPT is a unique type of irrevocable trust. It is both “self-settled” and “spendthrift,” meaning the grantor, or trustmaker, can be a trust beneficiary, and the trust’s design prevents beneficiaries from assigning the assets to outside creditors.

DAPTs were created about 23 years ago as an alternative to Foreign Asset Protection Trusts. Prior to DAPTs, people at risk of creditor judgements from court proceedings were putting their personal assets into protective overseas trusts in places like the British Virgin Islands and the Cayman Islands, if they could afford to do so. Now, DAPTs offer many of the same protections but in a way that is more cost-effective and more accessible.

There is, however, a catch to this form of strategic estate planning. Only about 17 states currently allow them. You can still establish a DAPT in a permissible state if you live in a non-DAPT state. It just gets riskier in a dispute. For example, if you establish the trust in a permissible state, your assets are in another, and you live in yet another state, there could be plenty of confusion over which state laws apply. Delaware, Alaska, Nevada, and South Dakota have the strongest DAPT laws, but trustees must reside in the same state where the DAPT is established.

The period of time that the assets remain in trust is also important. A short time frame between placing an asset in trust and a creditor claim could weaken protections. If it is too short, then a creditor could even claim a “fraudulent transfer.” It is recommended to fund a DAPT proactively with assets that have long-term need horizons. In other words, the longer the assets are held in the trust, the better. Make sure, however, that you will not need them immediately for pressing financial needs.

DAPTs are growing in popularity as more and more people discover the benefits of asset protection, which has the added benefit of allowing more estate wealth to transfer to heirs after one’s death. Less money for creditors means more money for your heirs. If you or someone you know would like more information, get in touch with our office to schedule a meeting.